Startup 2020: Step 11, Capitalize the Company
This is the eleventh article in a series on how to start a company in 2020. See the previous article, Draft Guerrilla Marketing and Sales Plan.
“There’s nothing wrong with raising venture capital. Many lean startups are ambitious and are able to deploy large amounts of capital. What differentiates them is their disciplined approach to determining when to spend money: after the fundamental elements of the business model have been empirically validated.” – Eric Ries, Author, Lean Startup
Novice entrepreneurs spend too much time trying to raise money. It’s a very time-consuming process that takes six months if you have a smoking hot business — and it takes forever if you don’t. Seasoned entrepreneurs don’t waste time chasing investors until such time that their business can afford them to do it and the odds of achieving a successful raise are good.
All you should be thinking about and doing at the start is getting customers; they are the best way to finance your business. If you get traction in the market, you have a better chance of raising money on reasonable terms. The best time to raise money is when you don’t need it.
At the outset, you need to be able to capitalize the company with “insider” money. Insider money is invested by the founders and possibly by family members and friends. This is called seed capital. You’re going to need enough seed capital to accomplish most of the things outlined in the previous chapters, including forming the company, conducting primary research, building a prototype, scrubbing the plan, and securing the intellectual property.
Outside investors are NOT going to give you money to accomplish these tasks unless you are a Rock Star entrepreneur with a successful track record. Even Mark Zuckerberg and his friends had to finance Facebook with their own money until they were able to show traction. The possible exception is what is called “convertible debt,” or a “bridge loan.” These financing instruments may be available if you have exceptional intellectual property (like a patent), or are using the money to purchase tangible assets.
If things go well you’re probably going to need outside capital at some point. Outside capital means money from accredited investors. It may be grants or loans. More likely it will be equity capital from angel investors or venture capitalists, meaning you will need to sell shares in your company. This is usually done as a Series A Financing.
The act of taking outside money increases a company’s legal obligations and liabilities significantly. The process of investor due diligence is akin to undergoing an intense tax audit. Everything there is to know about you and your company will be discovered and scrutinized.
Things to Think About and Decide
First, think about how much money you will need to accomplish the steps outlined in this guide, to get the business to a point where it is either cash- flow positive or able to attract outside capital.
Second, think about how long it will take to accomplish the steps and how long you can go without a salary.
Third, decide how much of your personal savings or your credit you and your co-founders can afford to risk.
Fourth, think about how much seed capital you might be able to raise from family and friends to cover the shortfall between what you need and what you and your team can invest.
Fifth, think about what other sources of capital may be available to you, such as loans or grants.
Sixth, decide whether your business is fundable and what needs to happen to attract funding.
Things to Do (or not)
- Do not pitch investors until you are 100% ready with a launched offering, some market traction and prepared materials.
- When you are ready to raise money, identify three to five critical growth metrics that will validate your revenue assumptions with investors. Predictable and forecastable revenue is the key to raising capital.
- Calculate the amount of money you need to raise to operate for a full year multiplied by 1.5.
- Develop a ‘use of proceeds’ chart for the desired money by identifying at least three quantifiable business objectives related to revenue that you can realistically achieve within three months, such as a number of customers or a volume of usage.
- Update your Executive Summary and investor deck with the amount of money and the use of proceeds.
- Identify at least 50 local angels, angel groups, early stage venture capitalists and other investors in a spreadsheet with their name, email address, telephone number, title, company, relationship, LinkedIn (or similar profile), related investments and notes.
- Identify at least three events over the next month where you can meet investors from your target list face-to-face and make plans to attend the event. BONUS: apply to present at pitch events.
- Create an investor pitch deck that shows how you are mitigating the risk for investors and offering the potential of a substantial return on investment.
- Create a detailed company profile on Angel List, GUST, NFX, and other startup company investment platforms.
- Check out the appropriate Crowdfunding platforms for your space.
- List your founders and your company in CrunchBase.
- Create, test and refine a 30 second “elevator pitch” on your company. A sixth grader should understand it. Your mother should understand it.
- Assemble all the due diligence documents that will be required by prospective investors. Upload them to a secure virtual data room for easy access by investors.
Recommended Readings & Resources
Raising Venture Capital, Pitching to Investors Travis Milks, Stonehenge Capital
The 10/20/30 Rule of PowerPoint Guy Kawasaki
Startups.com Startup and funding educational resources.
The Five Star Startup: A guide for determining which startup opportunities are worth your time and money
Stay tuned for the FINAL installment in this series, Step 12, Operate the Company